Sanctions spillover risks

Sanctions have become a regular U.S. policy tool, but economists and policy analysts say broader use can push other countries to build around the dollar instead of through it. (ofac.treasury.gov, nber.org) The U.S. Treasury’s Office of Foreign Assets Control says its programs can be “comprehensive or selective,” ranging from countrywide trade restrictions to targeted asset freezes on named people, banks, and companies. Treasury posted new sanctions actions on Iran, Sudan, Nicaragua and Russia-linked matters in April 2026 alone. (ofac.treasury.gov, ofac.treasury.gov) That distinction sits at the center of the current debate. Analysts arguing for narrower measures say sanctions aimed at specific officials, firms or networks are easier for allies and banks to absorb than sweeping pressure that hits trade, payments and financing more broadly. (ofac.treasury.gov, nber.org) The dollar still sits at the center of the global system. Atlantic Council data says it makes up 58% of disclosed foreign exchange reserves worldwide, while the euro accounts for 20%, and Brookings says the dollar is used in about 90% of foreign-exchange transactions. (atlanticcouncil.org, brookings.edu) That reach gives Washington unusual leverage because cross-border payments, trade finance and reserve management still run heavily through dollar markets and institutions. The same reach also gives other governments an incentive to reduce exposure if they think access can be cut off too easily. (atlanticcouncil.org, nber.org) A 2023 National Bureau of Economic Research paper, revised in January 2025, modeled that trade-off directly. The authors wrote that the expectation of future financial sanctions can reduce demand for dollar assets and lower the dollar’s “convenience yield,” the premium investors accept for holding the safest and most liquid asset. (nber.org) Recent policy research has tracked the same pressure in the real world. The Atlantic Council says countries stepped up diversification efforts after the Group of Seven expanded financial sanctions following Russia’s 2022 invasion of Ukraine, even as it concludes the dollar remains secure in the near and medium term. (atlanticcouncil.org) The alternatives are still limited, which is why most mainstream analysts do not forecast a sudden end to dollar dominance. The International Monetary Fund’s 2025 External Sector Report describes the dollar as still “at the center” of the international monetary system, and Brookings says the renminbi remains modest at about 2% of global reserves. (imf.org, brookings.edu) What has changed is the amount of hedging against that dominance. Atlantic Council says China’s Cross-Border Interbank Payment System had 193 direct participants and 1,573 indirect participants, and says mBridge’s cumulative transaction volume reached $55.49 billion by November 2025. (atlanticcouncil.org) Brookings says fragmentation is already showing up in investment flows, with foreign direct investment concentrating more within geopolitical blocs and emerging markets facing the risk of weaker inflows and higher borrowing costs. That means sanctions policy now lands not only on its targets, but also on banks, trading partners and countries trying to stay out of the fight. (brookings.edu) The argument surfacing now is not that sanctions stop working overnight. It is that the more often major powers reach for blanket financial pressure, the more they encourage a slower, expensive search for workarounds that can outlast the crisis that triggered them. (nber.org, atlanticcouncil.org)